Living Benefits

Another loose cannon in the current lexicon of confusing popular buzzwords. Living benefits began with the first cash value policy where the consumer could access their own “investment” component while still “living.” It’s history is also littered with the bodies of any benefit that took place before the death of the primary insured from accident benefits to children’s term.

Where the confusion begins to set in is the conceptual relationship with terminal illness allowances. Just for the record: The idea of present valuing an imminent death has been around from the beginning; conversations about immediate need where the inevitable was crystal clear were entertained and facilitated at home offices. Now comes the chicken and the egg conundrum as to where the fuel for viatical vs terminal illness allowances interact. Both companies and private resources understood that a short duration between a terminal health condition and the sure and certain knowledge that remaining premiums would be paid, and a death benefit would therefore also be paid, allowed for private accommodations. All that is being suggested is that the idea of funds remaining in the building may have helped fuel this dramatic expansion of accelerated death benefits aka living benefits. Although terminal illness payments may affect Medicaid and SSI benefits, they are generally viewed as a tax-free death benefit.

Terminal Illness riders are generally available on life policies most often as a “free” benefit. They also usually include a limitation as to the percentage of death benefit that is available. (Example: 75 percent.) It is important to stop here and emphasize the importance of not confusing Terminal Illness with Critical Illness. Terminal is just that requiring certification of no recovery and most often less than a 12 month life expectancy. A critical illness suggests the possibility of recovery. HIPAA dramatically expanded the conditions that could be viewed as an accelerated death benefit providing early tax-free death payments to include: Critical illness, disability income illness, nursing home illness and chronic illness. This expansion of tax-free benefits now fuels the current focus on “Living Benefits.” Initially this plethora of present value calculations followed a familiar and time tested formula: Benefit payments would be calculated by time and loss of money based on an early death not contemplated in the original mortality assumptions at the time of purchase, and, frequently, they were medically underwritten to estimate the severity of the condition and anticipated longevity.

I believe it is here that our current problems with chronic illness riders began. While this was a logical and practical approach, and the only one available at the time, that period of expediency has long passed. The long term care provisions of the Pension Protection Act that went into effect January 1, 2010, have fueled the rising combo market. In addition, recent liberalized provisions in the IIRC enhancing allowable critical illness claim trigger definitions have leveled the benefit playing field between an IRC Section 101g chronic illness life rider and a IRC Section 7702B health rider. Meaning simply about 24 months ago it became more advantageous to purchase an extended care benefit life rider on a pay as you go basis. This was of course already being done with 7702B riders after the PPA revisions on how those internal policy premium deductions for health insurance did not trigger a taxable event.

Now let’s cut to the reason for all this historical rambling. There are 70 plus companies with some form of chronic illness rider offered on their life policies and about 80 percent of those (before I go on, a reminder that this is an opinion column) simply do it wrong. At best they have chosen to not upgrade or modernize their offerings. The so-called discount method vividly outlined above is antiquated and potentially harmful to your E&O premiums. What needs to be clearly understood is that we can understand how and why they originally got there. We do not have to understand why they don’t fix it now. The often-repeated proclamation that there is “no current charge” for the rider is because you did not buy anything you can accurately measure and count on at the time of greatest need. Therefore I can only conclude the obvious—they do not like the risk. They do not understand the risk. They do not want to take any risk. I can’t make this any plainer—it is just too easy and inexpensive to fix it and do it right. If you cannot identify the actual cost or accurately predict the ultimate benefit, I would think that this is a transaction you might wish to step away from until you can. In the interim look for the 20 percent of companies who have a pay-as-you-go structure. Meaning simply that at all points in time you know exactly what the benefit costs and how much help it will deliver when required. Somehow that seems a much more practical and less dangerous approach to extended care planning.

Other than that I have no opinion on the subject.

Ronald R. Hagelman, CLTC, CSA, LTCP, has been a teacher, cattle rancher, agent, brokerage general agent, corporate consultant and home office executive. As a consultant he has created numerous individual and group insurance products.

A nationally recognized motivational speaker, Hagelman has served on the LIMRA, Society of Actuaries, and ILTCI committees. He is past president of the American Association for Long Term Care Insurance and continues to work with LTCI company advisory boards. He remains a contributing “friend” of the SOA LTCI Section Council and the SOA Future of LTCI committee. Hagelman and his partner Barry J. Fisher are principles of Ice Floe Consulting, providing consulting services for Chronic Illness/LTC product development and brokerage distribution strategies.

Hagelman can be reached at Ice Floe Consulting, 156 N. Solms Rd., New Braunfels, TX 78132 Telephone: 830-620-4066. Email: